The decline in prices of oil notwithstanding Oando Energy Resources (OER), the largest indigenous oil & gas producer in Nigeria and the Upstream subsidiary of Oando Plc, has announced a leap in financial revenue.
The company has realised a cash windfall in the sum of $234 million due to the proactive fiscal measures put in place prior to the slump in oil prices.
The funds will be applied towards a $238 million loan pre-payment, thereby substantially reducing the company’s total debt from $900 million in August 2014 to $615 million today.
Effectively, the company has managed to reduce its debt by 30 percent in the space of seven months post the acquisition of COPN.
OER successfully realized $234 million by resetting its crude oil hedge floor price from an average of $95.35 per barrel to $65.00 per barrel on 10,615 bbls/day for the next 18 months and another 1,553 bbls/day for a further 18 months until January 2019. The company will pay an additional $4 million from its cash reserves.
Hedge positions are investment decisions often taken by companies with the intention of offsetting potential losses/gains that may be incurred, especially during a global downturn.
The company’s $1.5 billion landmark acquisition of ConcoPhillips Nigeria (COPN) was funded with a 50/50 debt-equity mix. A repayment of $238 million on the debt portion used to close the acquisition implies that the company has effectively reduced the net purchase price to $1.2 billion.
OER, which has a current market capitalisation of $1 billion and a daily output of circa 53,100 boepd, had initially adopted hedging tools on its future crude production in anticipation of ongoing oil price volatility.
A statement from the company indicates that the proceeds from the hedge and additional funds will be used in prepayment of certain loan facilities, and commenting further, Pade Durotoye, CEO OER said:
“The decline in global crude oil prices led to a substantial gain for our company and we have 10,832 bbls/day average production hedged for the balance of 2015 and 8,000 bbls/day for 2016. “Cashing out some value from this hedge will enable us reduce our outstanding loans and leverage by $238 Million, saving the company $65 Million in interest payments over the remaining term of the loan facilities, whilst preserving a floor of $65 per barrel. With 50 percent of our Oil Production hedged and 65 percent of our production being gas committed to stable long term priced contracts, we are well positioned with strong cashflow to meet our obligations and aspirations through this current oil price down cycle.”
The hedge adoption effectively ensures OER receives income approximately pegged to a pre-agreed price, and enables it to conveniently service its debt obligations, which are denominated in both Naira and USD, regardless of oil prices and without foreign exchange exposure.
In spite of the global trends and domestic challenges facing indigenous oil & gas companies, OER has steadily navigated the ups and downs of the cyclical oil & gas market by adapting quickly and being fiscally innovative to enable its business operations run as normal.
The company’s short to mid-term strategy is focused on the growth of its Nigerian-based assets portfolio, including viable opportunities that optimise its operations, delivery, and Upstream footprint such as the ramp up of its production from 5,000 boep/d pre-acquisition of COPN to its present output of 53,100 boep/d, and the recently completed 45,000bbls/d, 51km Umuginni pipeline located in south-eastern Nigeria